Stock market reactions to COVID-19 and containment policies: A panel VAR approach

This study examines how stock markets worldwide react to the ongoing COVID-19 and government containment policies measured by the Oxford COVID-19 Government Response Tracker using panel VAR model. We analyze 15 countries: the G7, BRICS, and four northern European countries, and find that the increases in confirmed cases and deaths cause more stock market volatility, though do not have significant effects on stock returns. When governments strengthen their containment policies, stock volatility rises, while stock returns decline temporarily. Next, we divide the sample period into the early and late stages of infection, and find that in the former, the increases in confirmed cases and deaths induce a rise in volatility, and the impact lasts longer. In addition, government containment policies depress stock returns significantly. Moreover, reinforcing containment policies decreases stock returns in countries that introduced stricter containment policies. However, these effects induced by government containment policies might be mitigated by economic support policies because economic support policies have positive effects on stock returns without increasing volatility.